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Will Microsoft buy Novell?

The answer to that question is probably not, though the thought had crossed my mind. In a way they already have done in a small way, they have given Novell approximately a quater's worth of net profit in return for what appears to be a cut of all Open Enterprise and SUSE Linux sales. Although no shares have changed hands, this, in itself, seems to me to be a kind of "virtual" company sale. This is even not considering the palaver regarding the patent covenants....

During this last week I asked someone much wiser than myself "How come a company like Novell can be so easily duped?", I then quickly followed it on with the question "Or am I simply missing something important here?". He then asked me what I meant and I proceeded to explain my thoughts.

Novell has given away an ace for Microsoft to use as a weapon in convincing customers that there may be IP problems with GNU/Linux, despite any evidence of any kind backing this up, spreading fear, uncertainty and doubt over that in the enterprise. FUD in the original sense of the acronym. I find it difficult to believe that Novell would find this advantageous; for them to admit that there are IP issues in GNU/Linux would mean they could not legally distribute it, and for them not to would place them in an inconsistent position with the covenant and agreement they have signed. They seem to have publicly chosen the latter of the two. What they say privately I do not know.

The successful mass-deployment of SUSE enterprise distributions depends on the same thing as all of us in the GNU/Linux market, that is mass-acceptance of the GNU/Linux philosophy there. It is difficult to compete with Microsoft on Microsoft's terms, they are too good at it, and their current monopoly means they legally, and sometimes illegally, place restrictions on competing technologies. I find it hard to believe that Novell's management team believe they can increase revenue by following a path that increases Microsoft's install base in their area. After all, Microsoft do not have a track record of being nice about such things.

Novell also justify the agreement by claiming it will improve interoperability between Microsoft and GNU/Linux. I, as a member of the free software community, am not convinced by this. And I am not the only one. Jeremy Allison's interview with LinuxWorld shows that he is just as skeptical, if not more so, and he is an ex-Novell employee.

Did Novell really believe the agreement would result in increased Linux revenue (to what it would have been)? Do they really think interoperability with Microsoft will be improved? Or have I simply got the wrong end of the stick? The person of wisdom whom I asked put a different perspective on it.

He explained that Novell's old cash cow was NetWare; however, due to some silly decisions they made, and some clever ones Microsoft made, they lost that server market in a major way to Microsoft. In order for Netware to then get back their market, or even survive in the long term, they needed to inter-operate with the Microsoft protocols.

He went on to say that Microsoft, being well aware of this, started to not give the protocols to Novell. This placed Novell in a difficult position, and that was a major reason why Novell went into the GNU/Linux business despite the fact Red Hat were well entrenched as the enterprise market leader there. Microsoft were killing NetWare, and Novell needed to diversify.

He pointed out that Novell were losing revenue. In the last quarter's result Novell's profits, as seen here, were as follows:

.

Q1 2007

Q1 2006

Software Licenses

38,351

42,102

Maintenance and Services

191,225

200,192

Total:

229,576

242,294

Novell Revenue for Q1 2007 and 2006 (x 1000 USD)

Reading the "blurb" I notice they saw a "$15 million of revenue from Linux Platform Products, up 46 percent year-over-year", but a "combined revenue from Open Enterprise Server and products related to NetWare(R) declined 18 percent from the year ago period". They also quote a "651% increase of Linux invoicing" but that is quite meaningless without knowing exactly what that is. Their blurb though was heavily bullish regarding the GNU/Linux business though.

The conclusion I come to is that the figures above show that they are losing NetWare business faster than they are currently gaining that in GNU/Linux. This is reflected in their "Maintenance and Services" revenue is down 9%, a figure far more important than the "Software License" revenue in terms of both money and long term stability. Doubly important when considering the GNU/Linux business model.

My friend theorized that Novell needed, or wanted, the money. After all, they could not easily turn down a quarter's worth of revenue "just like that". At first I was skeptical, and even hostile, to that premise, but the more I thought about it the more I could see the logic.

All the above is, of course, in the minds of my friend and myself. I do not have access to the Novell board, nor does, I believe, my friend. We neither of us know exactly what is going on, nor the motivations behind it.

Despite the above, the thoughts going through my mind as I left the meeting was if Novell could sell a bit of their soul for a few pieces of silver, then what would they do next?

From my calculations Novell lost about 1.8 millions in identity-management but gained 4.7 millions from its Linux business. How come the 91 millions from invoicing into play? If they are what Novell earned through the coupons bought from M$, they are a Linux-related gain. I guess they are; because what else could that huge growth figure (659%) mean.

Unfortunately there are no figures that would let us calculate how much net loss there is in 'combined revenue from OES and NetWare'.

What really rained on Novell's financial report are the restructuring expenses et.al. that summ up to 23 million US$.

It really, really is far-fetched to speculate that Novell's Linux-strategy, including the MS-deal, resulted in a net loss for them. Novell has acquired a couple of really big customers this year, like Peugeot, Credit Suisse and Deutsche Bank, and many organisations consider for the first time using Linux on their desktops, now.

Although Novell still rejects the notion that Linux contains any IP-violations, the reassurance that customers won't face the threat of legal actions seems make the small but decisive difference when it comes to the decision whether or not to use Linux for many.

The VERY first thing I did when Novell and MS made their announcement last year, was download Arch Linux and Debian. Today, I'm an active user on both of those distros. I used to be an OpenSUSE user. (Suse 9.3 and OpenSUSE 10.0)

Novell was in a quite difficult financial situation at the time they reached the microsoft patent agreement.
There even was a time when Novell was about being bought even by SUN Microsystems:
http://linux.slashdot.org/article.pl?sid=04/08/02/1427243
This is: a 340 million dollars deal, very close to the sum they were owing. Technically we can say that with this agreement Microsoft has covertly bought Novell, although this cannot be a publicly official buy because Microsoft is a convicted monopolist.
Check the figures out:
http://www.theregister.co.uk/2006/09/20/novel_filing_delay/

If Dell were to install Novell Suse as their preloadad linux they would be caving into Microsoft IP infringement threats and FUD. Hope this will not happen, because it would be as if you were buying Microsoft's Linux with your Dell computer.(Microsoft would keep their "tax" on your computer)
Also, some encumbered formats are being introduced in Linux through Microsoft OOXML going into Novell's OpenOffice, thus trying to undermine the union of the community inside the two single products that more seriously menace their dominance and their only two cash cows: Linux (which is a threat for Windows) and OpenOffice (which is a threat for MS Office and its closed, locking-in, file formats).
Microsoft is for sure playing a divide and conquer game here. Beware!

And another thing that nobody has mentioned is Novell's IP, which somebody should point out has pulled even more cash out of MS's coffers than this deals worth over the last few years. This is a win win deal for both of them in my veiw, and has been very well received by our clients that are mixed environments. Why a win win.

Novell has realized that it can't go head to head with MS, MS simply cannot be outmarketed or outfoxed with the user base it has. Microsoft has finally relaized that they are no longer a boxed product company but indeed a solutions and support company (at least in the server and corporate desktop realm.

While the "Open Source" world indeed has always wanted MS in the crosshairs the simple fact is the business world wants solutions that are secure and productive. Why ? The business world knows there no good to come from a free lunch, especially when tomorrow comes around.

Yea, yea, yea....your a genius now that you figured out the NetWare business has been declining by ~15% year-over-year. Everyone in the FREE WORLD knows that! It still doesn't explain the "secret" reason why Novell would enter into a partnership with Microsoft.

Here's a thought.....HSBC, Walmart and the others who "PUBLICALY" stated that they've standardized on SLE and support this partnership. It is simple.....The Customer wants it!

Oh...by the way. 91 million in invoice dollars results in recognized revenue over the life of the subscriptions. If this trend continues then we'll all understand why this deal occured.

And by the way...wouldn't it S$ck for LINUX if Microsoft did by Novell. Now THAT would be something worth b@tching about!

Patents agreements are common between all companies in the same line of business.Companies realize that they always infringe on someone else's patents. Example, all car manufacturers have patent agreements among themselves. Why? Because there is no way they can manufacture a car without infringing. Do you think an automatic transmission fuel injection, air bags, anti lock brakes, blah blah was not patented by some companies and that the rest just cross license their inventions? Unfortunately in the US we have allowed software patents (the Supreme Court might or might not support strike them down, too early to tell). it means that companies must cross license their patents and they all do, so Novell doing it means nothing about the status of Linux infringing or not. What bothers open source community is that Novell had made a pledge to use THEIR patents against any company that tried to assert their patents against Linux. now with this agreement between Novell and MS, they cannot do that against MS if they decide to get nasty with Linux. That would be HUGE!

The author and his friend fail to take really discuss why MS would be interested in buying Novell and with what purpose and the chances of actually being able to do it:
1) What would MS gain? they will gain Novell very valuable patents (if courts allow them to stand) in networking. They will not gain much in the sense that they already have the right to use those patents, but at the same time it would add to their arsenal against Linux
2) Buying Novell means SuSE would be dead, not because MS will discontinue it but because their developers will leave SuSE. Don't forget that SuSE is mostly open source and MS cannot do with that code as they please. Any modification to the original SuSe GPL code will have to be open sourced.
3) Novell has over a billion dollars in the bank, that makes it attractive to many other companies, not just MS.
4) IBM owns part of Novell. they made some strategic investments with Novell when hey purchased SuSE. I am not sure if they own 5% or 15%. in any case IBM is not going to let MS purchase Novell and break that strategic alliance without IBM making it "painful' monetarily or legally. it would be easier for IBM to buy Novell because it fits them strategically in guaranteeing Linux succeeds. IBM makes a ton of money ($3 billion dollars a year) on Linux related activities and they are not going to let MS ruin that cash cow.
5) HP makes over $2 billion a year on Linux. i am sure they will not stay on the sidelines allowing MS to destroy another cash cow.
6) Sun/Oracle? They also have an interest in thwarting MS, not because they love Linux, but because they are aware Linux is a big thorn on MS side. Don't forget, "The enemy of my enemy is my friend"
7) MS being a convicted monopoly is not free to purchase any company they want. Other competitors will raise hell and go to court if needed to stop it. Can MS afford to be scrutinized again. I bet dinner at Peter Lugar steakhouse in Brooklyn, NY that they will not want to go through that again.

I can go on with a zillion other reasons what this article is so dumb, but let it stop here for now

MS has capitulated to Novell because of Novell's ongoing suite against MS worth billions...

MS backing Suse and the technology sharing is the Tipping Point of exception in the Enterprise for most all Novell products.

Suse destop/server sales will sell faster than anyone has imagined because of MS.

Novell's Zen is complete life cycle management of ALL platforms in the Enterprise to automate all aspects of deployment. This is best in class and wins the largest deployments in the world.

Novell's secure Identity Management IDM3 is second to none in the industry. It wins the largest deployments in the world. Tied in with Access Manager and Novell Audit and that is the ONLY soup to nuts Secure Identity Management worthy for the Enterprise...

Novell has 1.6 Billion in the bank.

Novell uses it's IP property to protect it's own customers at their cost. Novell has extentend that to include all MS IP as well for Novell customers. This is good...

Everyone beware of microsoft, they are losing their hold in the PC and they know it very well: expect any trick from them to keep their stranglehold on the computer marker. Have a look at insider's blog MSFTExtrememakeover latest post, which discusses, among many others, changes about MSFT's Linux strategy:
The phrase "The Novell SUSE distribution thing is a step in the right direction, but MSFT needs to do more" is scary. Nonetheless, the post is highly interesting:
source:
http://msftextrememakeover.blogspot.com/2007/03/for-want-of-shoe-or-time-for-new-rider.html
The LBU - Linux Business Unit
Yup, time to face the music and stop pretending Linux isn't here to stay. Not only is it, it's likely to eventually gain a significant share of global desktops (read: eventually much more than AAPL). So why is MSFT resisting it so hard versus simply embracing it as yet another opportunity to sell software a la the Mac Business Unit? IMO, MSFT should be focused on what it can still sell accounts who go this route. At a minimum, that could include Servers for legacy support of Windows apps. But maybe MSFT should even develop it's own "customer-friendly" linux distro (or, if GPL exposure of that code is an issue, maybe a non-GPL licensed library to run on any distro, or a BSD-based distro)? BTW, if they haven't taken steps to at least determine the engineering feasibility of that and effort required, then they're not doing their job. Additionally, why make it a religious battle? Like any OS, Linux does some things very well. For one, it's much more modular than Windows. So why not empower an internal group to promote it where it might make sense - like say in a set-top box or audio device? The Novell SUSE distribution thing is a step in the right direction, but MSFT needs to do more. Heck, if it can't convince itself that the Windows kernel and architecture is superior - and I can't find a single analysis that argues that's the case (company published or otherwise - if you have one btw, I'd be interested in a link) - maybe it should do an AAPL, hop on board a Mach/BSD kernel, and add value at higher levels only moving forward?

I think someone said it earlier, but... get this, paying customers want this to happen. They want things to work together, they want to have big companies to yell at, and sue if necessary. Try asking a CIO what his/her datacenter looks like; you'll find nearly all are a mix of Windows, Linux and other. Interoperability is a way of life.

So let's see: a covenant not to sue... Well, are you using any products based on Web Services. Maybe a C compiler? MPEG? and so on.

Every standard to some point has a CNTS or patent protection (not necessarily free). So stop using them if you are offended by the simple words of covenant not to sue.

OMG patents protection. Yeah right. How many times have you seen an offensive patent suit from each of the following companies: IBM, SUN Microsystems, Microsoft, Adobe, Oracle. The ability to exchange patent protections and extend them to customers is a valuable commodity. It is a sad commentary on the concept of software patents, but thats another rant.

Microsoft is reaching out to the OSS community. Take some time to look at http://port25.technet.com

Microsoft has offered to extend similar protections to any company in the Linux space.

There are some things about the Novell/Microsoft pact that might better explain what Microsoft gets out of this.

First the patent issue. Everyone seems to think that it's one-sided, with Microsoft getting the upper-hand. I'm not convinced. I think it's quite possible that Microsoft needed to get protection against Novell. I'm sure that Microsoft have seen the SCO source code, possibly long ago. They may even have been using some of it inside Windows. If they discovered that the code had been written by Novell and GPL's they could lose control of their source code, because it would be GPL'd.

Secondly I think that Microsoft knows that if Linux finally gets accepted as a reasonable desktop alternative then they will have to embrace it (as in embrace and extend.) The obvious thing for them to do would be to fork the kernel and enough of the main packages to create a complete distro pretty much incompatible with everyone else's. Released with a native version of some key Microsoft systems (Exchange, SQL Server) they could do to SuSE what Oracle just tried to do to Red Hat.

Author information

Biography

Edward Macnaghten has been a professional programmer, analyst and consultant for in excess of 20 years. His experiences include manufacturing commercially based software for a number of industries in a variety of different technical environments in Europe, Asia and the USA. He is currently running an IT consultancy specialising in free software solutions based in Cambridge UK. He also maintains his own web site.